Capital Planning

Many co-ops and condos that have deferred maintenance are now facing a host of problems, from leaky roofs to bursting pipes.

But Whittling’s situation is a walk in the park compared to Ruth Farrago’s. President of a 746-unit Queens co-op, she is trying to stay ahead of ever-mounting problems. The garden apartment buildings, spread out over 26 acres of property, have eleven boilers – of which the board has replaced three – and “hundreds of miles of sewers,” many of which are collapsing.

The problems don’t end there, however. Roof work is required; some of the walls are coming away from the buildings; and the lintels need repair because water is seeping in. And, oh yes, did she mention the termites?

“These are things that we really had not planned on facing all at once,” Farrago says with a sigh. “We put an assessment in last year, but that was a drop in the bucket. We have a lot of work to do.”

Welcome to the world of deferred maintenance, a place where problems mount and money is tight or unavailable; where the phrase “between a rock and a hard place” can be taken either metaphorically or literally, depending on what difficulty you are trying to cure. It’s a place where many boards are finding themselves these days after years of putting off daunting projects because they were too costly, too complicated, and too, well, daunting.

“A lot of people take this approach because they don’t have the money, and say, ‘If it’s not a problem now and we don’t have the money now, forget it. If it’s not squeaking, don’t put any oil on it,’” says Steve Greenbaum, director of management at Mark Greenberg Real Estate. “That can be a mistake.”

What can boards do to cope? How does one choose between one project and the next, and where, oh where, does the necessary money come from?

Tell Me Why

Boards defer maintenance for all sorts of reasons, but the primary one is cost. With gas, oil, insurance, and taxes on the rise, most budgets are squeezed and boards are reluctant to raise maintenance or pass on yet another special assessment.

“The only reason you might defer something is due to financial constraints,” notes Alvin Wasserman, director of Fairfield Property Services. “But that should only be a short-term deferral. You should not defer things long-term because, first of all, it doesn’t go away, and, second of all, the things that are going to need to be maintained are just going to add to the list, and it’s going to grow: once you get in that hole, it gets very difficult to dig yourself out, especially if you let it go for too long.”

Some of the key areas that get deferred include:

Plumbing. No matter how diligent a board is, the most difficult area to cope with is plumbing. Even with the best intentions to stay ahead of the problem, coping with aging pipes is tricky because they are in the walls or, in some cases, underground, and in either case, it involves tearing up someone’s property to get at them. “The sewers are underground,” says Farrago of her co-op’s 26 acres of property. “They’re under basements, they’re under walkways. There’s really not much we could do with that.”

Roofs. The roof is another major area that is deferred, primarily because of the huge expense involved in replacement. Better to patch as the leaks spring up, goes the logic, than shell out a huge sum. “Our roof was patched and patched and patched until it got to the point where there were so many leaks in so many different apartments that it really had to be looked at,” recalls Mel Vader, a board member at a 78-unit Brooklyn co-op. “We found that we had [too many] layers of roof. And we could not add any more. We realized that the whole thing had to be lifted up.”

Boilers. Boilers are also expensive, so many boards try to put off the replacement as long as possible.

Don’t Bother Me

So, when should you defer and when should you act? Sometimes, deferral is necessary. For instance, boilers should be repaired or replaced in the summer when no one is depending on them. And you don’t want to start replacing your roof in the middle of winter, or perform pointing work when temperatures are below 32 degrees.

When you defer, and when you don’t, also depends on specific financial factors. “It may be an issue that the mortgage is going to come due in two years so the board decides to wait to refinance and not be subject to a prepayment penalty,” says Lynn Whiting, director of management at Argo.

You also have to take into account natural deferrals caused by the bidding process. In undertaking a major capital project, for example, the board usually hires an architect/engineer. By the time it has reviewed the proposals, conducted interviews, and decided who to hire, three months may well have gone by. After the board selects an engineer, he has to prepare specifications for the job, which could take another six to eight weeks. Then he bids out the work. Contractors have to get their proposals in. After that, the board has to meet and inspect the bids. Typically, the bids will now go back to the engineer for evaluation. After the board chooses someone, a contract has to be prepared, and the job scheduled. This whole process can defer capital work for a considerable time.

“Boards often underestimate how long it’s going to take from the time they start planning and hiring an engineer to the time that the work is actually going to commence,” says Whiting. “Sometimes they start planning too late and the season for doing the job has passed.”

Money (That’s What I Want)

Money – or lack of it – is almost always the chief reason for deferred maintenance. “The board may have one riser that’s especially bad and problematic and they might be very interested in doing a comprehensive plumbing upgrade in the building but they don’t have the funds,” says Whiting. “So they may, as a matter of necessity, have to replace only certain risers that have been very problematic.”

“In general, it always comes back to cost,” agrees Greenbaum, the manager. “But it ultimately costs more to defer: besides costing you more money, you’re impeding the quality of life and making life more miserable for your shareholders than it would cost them if you had done it right the first time.”

Boards have sought out money by refinancing the underlying mortgage, taking out a line of credit, or even using contractor financing, in which the contractor provides a loan.

Some have also increased maintenance/common charges consistently – say, by two or three percent a year – and passed special assessments. But often that doesn’t do it. “The maintenance [increases] would never be enough to cover all the capital needs that we have right now,” says Farrago, the Queens president. “We’re 50-plus years old, and we’re seeing an escalation of capital needs that even 10 years ago weren’t there.”

At Farrago’s garden apartment complex, the board – after eight years of keeping the maintenance constant – put through its first increase, of ten percent, in 2003, and implemented its first assessment in 2004. In 2004, it also raised the maintenance again, this time by six percent. Now, in 2005, the co-op is trying to secure a second mortgage. “We’re in negotiations right now with the holder of our mortgage,” Farrago notes. “And actually, tonight at the board meeting, we’re going to make a determination as to exactly how much money we’re looking for.”

Ideally, much of the money to deal with deferred maintenance should come from the reserve fund, often dubbed “rainy-day money.” When it rains indoors, you should have cash on hand to repair those leaks – and not need to assess. “You’re better off being disciplined, and setting up a reserve fund where you put the money aside regularly rather than taking a loan from a bank,” Fairfield’s Wasserman notes. “Because with a loan, you’re going to be paying interest on it. So why pay interest unnecessarily? You should set up a reserve account.”

Unfortunately, not everyone sees the value of healthy reserves. Some boards have a short-term philosophy, which can be summed up as: “I don’t want to take money out of my pocket, out of my personal bank account, and put it into the co-op or condo’s bank, because who knows how long I’m going to be living here? I don’t want to leave that money if I move.”

Errol Griffiths, president of a 93-unit Manhattan co-op, echoes that sentiment: “We don’t believe that there is any need for [a very large fund],” he explains. “If you sell your apartment, you don’t get a share of that. It just sits there. And if you do the maintenance [increases] on a timely basis, then there really is no need for a huge amount of reserve. We have a reserve [that’s probably] about $150,000, maybe close to $180,000. If you don’t have any pressing problems, then you don’t really need it for anything. It just sits there. You could just as easily take out a loan or refinance.”

“This has been my pet thing since I’ve been on the board,” adds Vader, the Brooklyn board member. “I had hoped that, years ago, we would have had a half-million dollars [in reserves]. But the other board members looked at me like I was crazy. I like money behind me; money gives you power to do things. You don’t have to go [begging] to the shareholders as much. A number of people on the boards over the years did not want to have the $150,000 reserves enlarged, partly because they felt that they couldn’t get a halfway decent return and then they didn’t want their money going into it. It was very much a renter mentality.”

The counter-argument is that having a reserve fund will increase value for discriminating buyers. “One of the first things they usually ask for is a copy of the financial statement,” Wasserman says. “And if they see no reserve fund and no contingency fund at all, the smart buyers will run.”

I Should Have Known Better

One way to avoid crises that require huge sums of money being laid out at once is to perform what David Kuperberg, president of Cooper Square Realty, calls a “best practices” approach, but which others simply label “preventive maintenance.” Simply put, this means properly maintaining and caring for your building systems so small problems don’t mushroom into large ones.

“We have done a lot of preventive maintenance on our boilers, which has kept them alive,” says Farrago, the Queens president. “If you would have asked me seven years ago, I would have told you more than half of my boilers would have had to be replaced within the next year or two. But through aggressive maintenance, the boilers actually function better now than they probably did back then.”

Dick Pollak, the president of a 48-unit Riverside Drive co-op in Manhattan, says that the board initiated a complete overhaul of the risers, replacing them over a three-year period. “We were having a lot of broken pipes and there was a lot of damage into the apartments,” explains Nick Orozco, the building’s super. “A lot of the risers were actually galvanized and yellow brass, which is against the law in New York City now. We finished that and now we’re doing the branch lines. We have a budget and are replacing all of the pipes in every single apartment.”

Regular “walk-throughs” – roof-to-basement inspections by the manager and/or super – can help you identify problem areas before they get worse. “Our super does it with our property manager,” Whittling, the Manhattan president, reports. “And we have a great super. He just doesn’t hesitate to say, ‘I’ve noticed a step is broken,’ or something that isn’t right, whatever it may be. Then we focus on it.”

Many management firms perform such periodic reviews. Cooper Square Realty, for instance, has implemented its “best practices” system. That means each property has a book with a digital photo of every item in the building, its useful life, repair history, and other data, which helps ensure proper preventive maintenance. Another book includes a list of all the vendor contracts. The company also requires that the site managers keep an “action list” of open items needing attention.

“This is how we are implementing procedures for preventive maintenance,” says Kuperberg. “If you make equipment last longer and make it more efficient, you can save money.”

“I’m personally a big fan, in general, of preventive maintenance,” adds Gerry Fifer, president of a 32-unit Manhattan condo. “Because in one of my past careers I was a mechanic, I just know that with certain problems if you let them go, they’re going to get much worse and they’re going to be more costly and harder to fix. It’s just better to do them sooner than later.”
The Long and Winding Road

To make the task less overwhelming, savvy boards prepare a long-term plan, which helps them prioritize. At 304 West 75th Street in Manhattan, for instance, the board decided to be proactive and not wait for leaks. “We knew there was a certain amount of façade work that needed to be done,” says Whiting, the co-op’s property manager. “So we hired an engineer, he did the specs, and we bid it out. We saw the [dollar amount] number and we were blown away. We did not have that much money to pay for this job. It was just impossible.”

Instead, the board and the manager met with an architect and asked him to make the plans and set priorities. So he broke it down into two parts. Phase one was completed immediately, and phase two was begun three or four years later when, says Whiting, the financial picture was rosier: the mortgage rates had gone down, the mortgage had come due, and the co-op could refinance at a better rate.

“The reality is that hardly any building can afford to do everything that needs to be done at the same time,” adds Whittling. “That’s why you need to make your list, set your priorities, and work off of those. Therefore, you’re not bouncing around, letting one crisis after another dictate what you’re doing.”

Greenbaum, the manager, says that a board should acknowledge the need for planning, especially if, for example, its roof is 15 years old, its boilers are the originals, its windows are falling apart, its lobby is shabby, and its façade is crumbling. Those buildings need to take a hard look at what needs to be done, put a dollar figure on it, and then craft a plan.

“You’ve got to set long-term and short-term goals for the buildings and follow up on them, because that’s really how you can attack what you need to do,” says Greenbaum. “A lot of people just don’t get it. When we take over a building, we ask them to put together a wish list, asking what people wish to accomplish over the next year, two years, five years. And if they don’t have the money now, maybe they should look to the future and that should be one of their wishes. A lot of buildings don’t plan. But things are going to break down. Things are going to need to be repaired. You can’t just sit there.”

Listen to What the Man Said

Through it all, the board should try and communicate with the owners, explaining the difficulties and why there is an assessment or an increase in the monthly maintenance/common charge bill.

Fifer, the Manhattan president, found it useful to bring to the unit-owners meeting a concrete example of why increases were being implemented. Concerned about its aging pipes, the board hired a plumbing engineering firm to review the entire plumbing system in the building, including the pumps. The subsequent report confirmed what the board had suspected from intermittent patch jobs over the years: the building was filled with galvanized pipe that had built up sediment inside, making the inner diameter smaller and smaller, until, eventually, the water was just trickling through.

“When we would do localized plumbing jobs, the plumber would cut out sections of pipe and show us, and we showed the unit-owners,” Fifer says. “That was very useful. You can see how small a channel there is for the water. And that’s why the water pressure is inadequate. I had the super bring the section of pipe to the annual meeting a year or two ago, and he keeps it in the basement so he can just show people if they ask him. It’s very effective.” As a result, Fifer’s condo has successfully laid the groundwork for implementing a large-scale pipe replacement job.

“People are concerned about their money,” notes Vader. “People have to know that the roof has to be fixed because things will come down from the roof. And once you have a leak, it is a major problem because if you’re having a leak in an apartment, you have an envelope that has been compromised; you have wood decking that has been compromised. Lots of things have happened before that water has gotten into an apartment. When you explain it, people grumble, but they usually go along.”

In the end, it’s all about planning, planning, planning – and explaining to your owners (some board members included) why work needs to be done. “Sometimes people just stick their head in the ground and don’t even look, ostrich-like,” Vader says. “How do you shift people’s attitudes to doing things? Inertia sets in. Some things just have to be done and it will cost you quintuple if you delay. The longer you keep the reserve fund and not use it, the less its value because of inflation.”

Remember: you should only defer when necessary, and draw a cautionary lesson from the experience of the Big Apple. “A perfect example is what happened to New York City in the 1960s and 1970s where they deferred maintenance on the infrastructure,” recalls Wasserman of Fairfield. “In 1975, the city nearly went bankrupt. And the bridges were collapsing, the tunnels were collapsing, the subways were collapsing. The city was on the verge of ruin. If you defer maintenance indefinitely that’s what’s going to happen. You are going to create a situation that over time will cause the infrastructure of your property to come down around your knees.”